Lifetime ISA – not just any old ISA

by Kristen

Receive attractive new tax benefits with a Lifetime ISA

First-time buyers can now save up to £4,000 a year into a LISA (Lifetime ISA). And if you do, the state will add a 25% bonus on top. For example, if you save £2,000 a year, you will receive £500 from the state. If you save the full £4,000 you will receive £1,000 from the state. Plus, all this is before growth or interest.

You can receive upto £32,000 from the state if you make the maximum contributions from aged 18 to 50. You must be at least 18 years of age but below 40 and resident of the United Kingdom to be eligible to open a LISA.

The main aim of this product is to help you save for your first home or retirement. Therefore, all LISA funds must be used to buy your first home (worth up to £450,000) or locked away until you are 60. Like a normal ISA, you can either hold your money in cash or shares. Investing in funds and individual stocks allows your assets the potential to grow tax-free.

Access your Lifetime ISA before 60 – but beware!

You can access your LISA from age 60, or even beforehand. However, if you take any cash before your 60th birthday, you will pay a 25% penalty AND lose your government contribution. Also, you will lose any investment gains made on the government contributions. During the first year of LISA operation, these withdrawal penalties will not be charged.

Contributions can continue to be paid until your 50th Birthday however, George Osborne warned that the 25% could eventually fall back and the rate drop.

There has been a lot of controversy and confusion around the LISA so far because of its dual purpose. Aegon Pensions Director Steven Cameron believes the two aims are “incompatible” since they require very different investment strategies. He says:

If a house deposit is your primary aim, the Lifetime ISA is attractive, but don’t pretend yourself it’s also taking care of your retirement planning.

Others also believe planning for retirement will take a hit, with house prices on the rise and millennials saving for a house instead.

Lifetime ISA or Company Pension?

Should you favour the LISA over company pension schemes? Attracted by the 25% government contribution, workers have weighing up the benefits of a LISA versus a company pension. For many it is an easy choice as the LISA doesn’t attract valuable employer pension contributions. Although the employer pension contributions will be more valuable than £1,000 per year in government contributions, you won’t be able to access your pension for a housing deposit early unlike the LISA.

If you’d like to receive further information and advice about the suitability of a LISA, Red Star Wealth Management will be pleased to help.

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